World Markets in Motion

US Industry Overview

Monday, October 15, 2007

Oil and gas giant BP plc.(BP) is staged to release 3rd quarter earnings on October 23rd. As previously disclosed by the company's freshly instated CEO, Tony Hayward, earnings should be nothing short of dreadful. Furthermore, Hayward reiterate that BP's results would be the worst financial performance since the 1992-1993 time frame. To many this should come as odd since crude oil continues to hit new highs, but for BP, making money in the arena of $80 oil isn't quite so easy. BP has endured a slew of mismanagement and financial problems ranging from tighteningmargins, falling natural gas prices, overlapping management, refinery explosions and environmental issues. Making matters worse were the politically distasteful homosexual meanderings of ousted CEO Lord Browne.

To investors, the end result is a company severally lagging its peers. Amongst all of this turmoil however, could be a remarkable buying opportunity. With 'dreadful' earnings to be released shortly, and fresh management at the helm, A BP turn around could be as close as next year for this conglomerate. This is of course subject to change if the faltering giant is unable to deliver its newly purposed restructuring plan.

Underperformance

A significant portion of BP's troubles have been associated with delays regarding two of its largest projects. BP's largest project, the Thunder Horse is currently the worlds largest semi-submursed oil rig. Originally delivered in 2004, this $1 billion rig sustained marked damages during the 2005 hurricane season as well as recurrent equipment malfunctions. The result was a mega project with costly delays. Unfortunately for BP, at peak production this facility is targeted to produce 250,000 barrels of oil per day(bpd) and 200 million cubic feet of natural gas on a daily basis. According to the company's latest estimates, Thunder Horse should regain production near the end of 2008.

BP's Atlantis is yet another massive project inflicted with project delays and seemingly all to common technical difficulties. Until the completion of Thunder Horse, this 200,000 bpd project will command the title of largest oil producer in the Gulf of Mexico. The Atlantis is set for commercial production starting December of this fiscal 2007. Upon completion, these two facilities should add significantly to BP's production capacity and in theory contribute directly to the top line. BP controls 56 and 75 percent of the Atlantis and Thunder Horse projects, respectively.

Toppled Thunder Horse 2005

Image Problems

Of all the integrate oil giants, from ExxonMobil to Chevron, BP is the least in touch with its roots. After all this is the very same oil company who shockingly renamed the company Beyond Petroleum. While my inner environmentalist enjoys this in theory, BP has had its share of egregious safety and environmental violations. Yet another problem is the striking resemblance between two of BP's most recent snafus.

In May of this year a US congressional committee concluded that, "severe pressures for cost-cutting," were the cause of BP's March 2006 Prudhoe Bay spill which leaked nearly 6,500 barrels into the Alaskan wilderness. The event further tainted BP's credibility and cost the giant $250 million in maintenance costs as 16 miles of deteriorating pipeline were replaced.

For BP, this spill came shortly after a 2005 refinery explosion which cost 15 individuals their lives. This event, which BP largely attributes to worker negligence and miscalculations seems all too similar to the Alaskan oil spill, where cost cutting and inappropriate investments lead to the eventual explosion. Chief executive officer of the US Chemical Safety Board informed the US congressional committee that, "virtually all" of the Prudhoe Bay misjudgments correlated strongly to the refinery disaster.

The Aftermath

So where does this leave us? BP's 1-year performance pails in comparison to an industry which has reaped the benefits of increasingly expensive crude oil. Due to BP's missteps during the same period, the conglomerate has largely not participated on the impressive run these producers have enjoyed. If the consensus of expensive oil continues and BP is actually capable of delivering its revised business restructuring, then we could be looking at an undervalued company, when compared to its peers. Judging from the streets reaction to Friday's restructuring plan, BP seems well on its way to amending its current operational issues.